23I. Prohibition of deductions in respect of certain intellectual property
Category: Section 23I (ITA) – Prohibition of deductions in respect of certain intellectual property
Section 23I
- Paragraph (a) of definition of “intellectual property” substituted by section 58 of Act 31 of 2013 effective on 12 December 2013.
- Paragraph (b) of definition of “intellectual property” substituted by section 58 of Act 31 of 2013 effective on 12 December 2013.
- Paragraph (c) of definition of “intellectual property” substituted by section 58 of Act 31 of 2013 effective on 12 December 2013.
- Paragraph (d) of definition of “intellectual property” substituted by section 58 of Act 31 of 2013 effective on 12 December 2013.
- Paragraph (a) of definition of “tainted intellectual property” substituted by section 36 of Act 17 of 2009 and section 47 of Act 22 of 2012 effective on 1 April 2012.
- Words preceding subparagraph (d)(i) of definition of “tainted intellectual property” substituted by section 47 of Act 22 of 2012.
- Paragraph (b) of definition of “taxable person” substituted by section 44 of Act 7 of 2010.
- Paragraph (2)(a) substituted by section 58 of Act 31 of 2013 effective on 12 December 2013.
- Subsection (3) substituted by section 47 of Act 22 of 2012 effective on 1 July 2013.
- Section 23I inserted by section 37 of Act 35 of 2007 effective on 1 January 2009 and substituted by section 38 of Act 60 of 2008 effective on 1 January 2009.
“End user” definition of section 23I of ITA
(1) For the purposes of this section-
“end user” means a taxable person or a person with a permanent establishment within the Republic that uses intellectual property or any corresponding invention during a year of assessment to derive income, other than a person that derives income mainly by virtue of the grant of use or right of use or permission to use intellectual property or any corresponding invention;
[Definition of “end user” substituted by section 36 of Act 43 of 2014 effective on 20 January 2015]
“Intellectual property” definition of section 23I of ITA
“intellectual property” means any-
(a) patent as defined in the Patents Act including any application for a patent in terms of that Act;
(b) design as defined in the Designs Act;
(c) trade mark as defined in the Trade Marks Act;
(d) copyright as defined in the Copyright Act;
(e) patent, design, trade mark or copyright defined or described in any similar law to that in paragraph (a), (b), (c) or (d) of a country other than the Republic;
(f) property or right of a similar nature to that in paragraph (a), (b), (c), (d) or (e); and
(g) knowledge connected to the use of such patent, design, trade mark, copyright, property or right;
“Tainted intellectual property” definition of section 23I of ITA
“tainted intellectual property” means intellectual property-
(a) which was the property of the end user or of a taxable person that is or was a connected person, as defined in section 31(4), in relation to the end user;
(b) which is the property of a taxable person;
(c) a material part of which was used by a taxable person in carrying on a business while that property was the property of a taxable person and the end user of that property acquired that business or a material part thereof as a going concern; or
(d) which was discovered, devised, developed, created or produced by the end user of that property, or by a taxable person that is a connected person, as defined in section 31(4), in relation to the end user, if that end user, together with any taxable person that is a connected person in relation to that end user, holds at least 20 per cent of the participation rights, as defined in section 9D, in a person by or to whom an amount is received or accrues-
(i) by virtue of the grant of use or right of use or permission to use that property; or
[Subparagraph (i) substituted by section 36 of Act 43 of 2014 effective on 20 January 2015]
(ii) where that receipt, accrual or amount is determined directly or indirectly with reference to expenditure incurred for the use or right of use or permission to use that property;
[Subparagraph (ii) substituted by section 36 of Act 43 of 2014 effective on 20 January 2015]
“Taxable person” definition of section 23I of ITA
“taxable person” means any person other than-
(a) a person that is not a resident;
(b) the government of the Republic in the national, provincial or local sphere contemplated in section 10(1)(a);
(c) an institution, board or body contemplated in section 10(1)(cA);
(d) any public benefit organisation as defined in section 30 that has been approved by the Commissioner in terms of that section;
(e) any recreational club as defined in section 30A that has been approved by the Commissioner in terms of that section;
(f) any company or trust contemplated in section 37A;
(g) any fund contemplated in section 10(1)(d)(i) or (ii); or
(h) any person contemplated in section 10(1)(t).
Subsections 2 and 3 of section 23I of ITA
(2) Other than a deduction allowed in terms of section 11(gC) or a deduction allowed in respect of trading stock, a deduction is not allowed in respect of-
(a) any amount of expenditure incurred for the use or right of use of or permission to use tainted intellectual property; or
(b) expenditure the incurral or amount of which is determined directly or indirectly with reference to expenditure incurred for the use or, right of use of or permission to use tainted intellectual property,
[Paragraph (b) substituted by section 36 of Act 43 of 2014 effective on 20 January 2015]
to the extent that the amount of expenditure does not constitute income received by or accrued to any other person or to the extent that the amount of expenditure does not constitute a proportional amount of net income of a controlled foreign company an amount equal to which is included in the income of any resident in terms of section 9D.
(3) Notwithstanding any provision of subsection (2) to the contrary, an amount equal to-
(a) one third of any expenditure contemplated in subsection (2) must be allowed to be deducted if withholding tax on royalties contemplated in Part IVA is payable in respect of that amount at a rate of 10 per cent; or
(b) one half of any expenditure contemplated in subsection (2) must be allowed to be deducted if withholding tax on royalties contemplated in Part IVA is payable in respect of that amount at a rate of 15 per cent.
(4) Subsection (2) must not apply where the aggregate amount of taxes on income payable to all spheres of government of any country other than the Republic by a controlled foreign company contemplated in that subsection in respect of the foreign tax year of that controlled foreign company is at least 67,5 per cent of the amount of normal tax that would have been payable in respect of any taxable income of the controlled foreign company had the controlled foreign company been a resident for that foreign tax year: Provided that the aggregate amount of tax payable by a controlled foreign company in respect of a foreign tax year of that controlled foreign company must be determined—
(a) after taking into account any applicable agreement for the prevention of double taxation and any credit, rebate or other right of recovery of tax from any sphere of government of any country other than the Republic; and
(b) after disregarding any loss in respect of a year other than that foreign tax year or from a company other than that controlled foreign company.
[Subsection (4) added by section 38(1) of Act 17 of 2017 and amended by section 27(1) of Act 34 of 2019 effective on 1 January, 2020 and applicable in respect of years of assessment ending on or after that date]